UK economy contracted by 0.6% in last three months of 2010

Office for National Statistics stuck to its view that the harsh winter weather in December - the coldest December on record - contributed 0.5 percentage points to the decline

Office for National Statistics stuck to its view that the harsh winter weather in December - the coldest December on record - contributed 0.5 percentage points to the decline. Photograph: Steve Parsons/PA

Britain's economy shrank by 0.6% in the final quarter of last year, a sharper fall than previously thought.

The surprise downward revision, from a 0.5% quarterly drop reported last month, was blamed on industry and service sector firms whose performance was worse than originally estimated. Consumer spending also slipped and the economy was kept afloat by higher government spending, which will see sharp cuts in coming months.

The Office for National Statistics stuck to its view that the harsh winter weather in December – the coldest December on record – contributed 0.5 percentage points to the decline, so without the snow GDP would still have shown a slight fall.

Meanwhile the US economy grew more slowly than initially estimated in the fourth quarter as government spending contracted at a sharper rate and consumer spending was less robust than first thought. US GDP rose at an annualised rate of 2.8%, revised down from 3.2%.

Output from the UK service industries fell by 0.7% between October and December from the previous quarter, rather than 0.5% – led by a 1.1% drop in finance and business services – while industrial production was also revised lower to show growth of 0.7% compared with the earlier estimate of 0.9%. Construction slumped by 2.5%.

TUC general secretary Brendan Barber said: "The government's hope of an upwards revision of growth has been dashed. It's time to wake up and smell an economy in big trouble. We need a plan B that doesn't send it over the edge with deep rapid spending cuts."

The figures highlight the dilemma faced by the Bank of England, as inflation is running at double its target while the economy remains fragile. Household spending fell by 0.1% in the fourth quarter, the first drop in 18 months. This suggests households were tightening their belts even before the VAT increase and the government's spending squeeze kicked in. A bigger trade deficit and a 2.5% slump in business investment also contributed to the overall decline. Government spending grew by 0.7% but this would not last, economists warned.

"The detail shows that government spending was the only positive growth driver," said James Knightley at ING. "This is fairly worrying given we know about the wave of fiscal austerity that is now starting to hit the UK economy, meaning that we will soon be starting to see negative figures for this component."

The Treasury said the figures did not affect its determination to tackle the country's record budget deficit. "The chancellor said that the fourth-quarter growth figures were disappointing and today's revision doesn't change that fact," said a Treasury spokesman.

"It also doesn't change the need to deal with the nation's credit card – the country is borrowing more this year than is spent on the entire NHS." He also noted that surveys, which showed the economy bounced back at the start of the year, had "exceeded expectations".

Shadow chancellor Ed Balls hit out at the government's deficit-cutting plans. "2011 should be the year when the British economy grows strongly and the recovery is secured. Yet the early signs are that the Tory-led government's reckless decision to abandon Labour's plan to halve the deficit over four years has seen the economy take a turn for the worse," Balls said.

"We now face the worst of all worlds – unemployment and inflation both rising, growth stalled and consumer confidence collapsed. And this is before the government's extreme fiscal tightening really starts to bite."

"The slight downward revision to UK GDP might give the more hawkishly inclined members of the MPC reason to pause for thought," said Vicky Redwood, senior UK economist at Capital Economics.

"Of course, we already know from the Cips surveys that the economy bounced back at the start of the year. But we can't tell how much of this was due to weather effects. Indeed, the other economic news of late has not been very reassuring – including the weak consumer confidence figures released overnight. We still think that the economic recovery will struggle this year and expect growth of just 1.5% or so."